At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards ABB Ltd (NYSE:ABB) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Hedge fund interest in ABB Ltd (NYSE:ABB) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Newmont Corporation (NYSE:NEM), Raytheon Company (NYSE:RTN), and Ambev SA (NYSE:ABEV) to gather more data points. Our calculations also showed that ABB isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_26044" align="aligncenter" width="359"] Ken Griffin of Citadel Investment Group[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's take a look at the latest hedge fund action regarding ABB Ltd (NYSE:ABB).
What does smart money think about ABB Ltd (NYSE:ABB)?
Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ABB over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in ABB Ltd (NYSE:ABB) was held by Fisher Asset Management, which reported holding $230.9 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $21.7 million position. Other investors bullish on the company included 13D Management, Citadel Investment Group, and Beddow Capital Management. In terms of the portfolio weights assigned to each position 13D Management allocated the biggest weight to ABB Ltd (NYSE:ABB), around 5.15% of its 13F portfolio. Beddow Capital Management is also relatively very bullish on the stock, designating 4.18 percent of its 13F equity portfolio to ABB.
Because ABB Ltd (NYSE:ABB) has faced bearish sentiment from hedge fund managers, we can see that there was a specific group of funds that elected to cut their positions entirely heading into Q4. Interestingly, Jonathan Barrett and Paul Segal's Luminus Management said goodbye to the largest investment of the 750 funds tracked by Insider Monkey, valued at an estimated $7.7 million in stock, and Joel Greenblatt's Gotham Asset Management was right behind this move, as the fund sold off about $0.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as ABB Ltd (NYSE:ABB) but similarly valued. We will take a look at Newmont Corporation (NYSE:NEM), Raytheon Company (NYSE:RTN), Ambev SA (NYSE:ABEV), and Digital Realty Trust, Inc. (NYSE:DLR). This group of stocks' market caps match ABB's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEM,43,1023580,9 RTN,51,1829093,-2 ABEV,9,254473,-5 DLR,29,302894,3 Average,33,852510,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $853 million. That figure was $277 million in ABB's case. Raytheon Company (NYSE:RTN) is the most popular stock in this table. On the other hand Ambev SA (NYSE:ABEV) is the least popular one with only 9 bullish hedge fund positions. ABB Ltd (NYSE:ABB) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on ABB as the stock returned 30.7% during the second quarter and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.